The Irish Financial Crisis Was Both Predictable and...
DISCUSSION PAPER SERIES No. 7811 WHATEVER HAPPENED TO IRELAND?
Morgan Kelly INTERNATIONAL MACROECONOMICS ABCD www.cepr.org
Available online at: www.cepr.org/pubs/dps/DP7811.asp www.ssrn.com/xxx/xxx/xxx
ISSN 0265 8003 WHATEVER HAPPENED TO IRELAND? Morgan Kelly,
University College Dublin and CEPR Discussion Paper No. 7811 May 2010 Centre
for Economic Policy Research 53 56 Gt Sutton St, London EC1V 0DG, UK Tel:
(44 20) 7183 8801, Fax: (44 20) 7183 8820 Email:
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www.cepr.org This Discussion Paper is issued under the auspices of the Centre s
research programme in INTERNATIONAL MACROECONOMICS. Any opinions
expressed here are those of the author(s) and not those of the Centre for Economic
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An earlier version of this paper circulated under the title The Irish Credit Bubble. I
would like to thank Colm McCarthy for useful discussions. All errors and
interpretations are mine. 1 Ireland is one case where the classroom distinction
between GNP and GDP really matters: largely because of transfer pricing by foreign
corporations taking advantage of its 12 per cent rate of corporation tax, GDP is 25
per cent higher than GNP, and has fallen only 12.5 per cent. In what follows we shall
present most Irish numbers as a percentage of GNP, because this is the relevant
п¬Ѓgure for employment and discretionary taxation, and present numbers for other
countries in the usual percentage of GDP form. в€ — 1 The key to understanding
what happened to Ireland is to realise that, although GNP grew by 5 to 15 per cent
every year from 1991 to 2006, this Celtic Tiger growth stemmed from two very
different booms. First, during the 1990s, there was rising employment associated
with increased competitiveness and a quadrupling of real exports. As Ireland
converged to average levels of Western European income around 2000 it might have
been expected that growth would fall to normal European levels. Instead growth
continued at high rates until 2007 despite falling competitiveness, driven by a second
boom in construction. Ireland went from getting 4 6 per cent